A government wants to fix its exchange rate, but it does not want to give up its monetary policy. Instead, it imposes a
Posted: Sun Jun 05, 2022 4:41 pm
A government wants to fix its exchange rate,
but it does not want to give up its monetary
policy. Instead, it imposes a per-unit cost of
exchanging currency πc, so that for every 1 unit of
domestic currency converted to 1/πΈπ·/πΉ1/ED/F units of foreign
currency, a cost of πc incurs. There is no cost incurred in the
conversion of foreign currency back to domestic currency.
** Part a (5 marks)
Modify the exact version of the
uncovered interest rate parity to suit this
situation.
** Part b (5 marks)
Graphically show that it is now possible to change the money
supply ππ while keeping the exchange rate pegged (holding
other things constant).
but it does not want to give up its monetary
policy. Instead, it imposes a per-unit cost of
exchanging currency πc, so that for every 1 unit of
domestic currency converted to 1/πΈπ·/πΉ1/ED/F units of foreign
currency, a cost of πc incurs. There is no cost incurred in the
conversion of foreign currency back to domestic currency.
** Part a (5 marks)
Modify the exact version of the
uncovered interest rate parity to suit this
situation.
** Part b (5 marks)
Graphically show that it is now possible to change the money
supply ππ while keeping the exchange rate pegged (holding
other things constant).